Shares in Petra Diamonds are well off their worst levels this morning (-10.5% vs -21%) as bargain hunters step in to engineer a bounce from a revisit of November lows. A disappointing H1 trading update is the culprit, confirming record production (+10%, in-line) but overshadowed by lower grade production guidance (both grade and volumes), lower sales and industrial action. Lower production can, to some extent, be offset by higher diamond prices, not having a big impact FY 18 revenue guidance. However, EBITDA is now forecast a significant 10-15% lower, hence the share price reaction this morning. This can be explained by a 20% strengthening in the South African rand since November, fuelled by the ANC naming a Zuma replacement and last year’s USD rally beginning to unwind, a trend which has impacted its USD cost base and could have legs, worsening the company’s financial situation.

Whilst the bumper 71K carat first Williamson parcel remains blocked for export by the Tanzanian government (royalty dispute), significant sales are prevented, tying up working capital and keeping the company at peak debt levels. A reminder that mining in Africa remains as much about politics as it does about what you can get out of the ground. A breach of end-Dec debt covenants is still expected and the company is in discussions with lenders which it of course hopes will be positive. Bulls will be hoping that good news is forthcoming, or at least in a strong appetite from fellow bargain hunters that helps the shares rally 11% to close today’s gap down from 80p, or maybe even the whole 27% back to January’s recent rebound highs.

Mike van Dulken, Head of Research, 29 Jan 2018